Crude's Ascent Puts Alternative Energy Stocks In Focus B
Crude's Ascent Puts Alternative Energy Stocks In Focus By Anjali Cordeiro Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Oil giants such as Exxon Mobil Corp. (XOM) aren't the only stocks that could benefit from soaring crude prices. Smaller, less-known companies offering alternative energy products have been drawing increasing attention over the past year as hurricanes and geopolitical issues roiled international energy markets. Some small-capitalization companies in the "next- generation energy" sector have seen their share prices jump, as investors hoped that their products would attract a larger market share given the volatility of oil prices. Many of these companies offer innovative and feasible technologies in areas such as hydrogen, solar and wind energy. Still, most small companies in the group aren't profitable as yet. In many cases, the cost of the technology they offer remains high, and that has limited the commercialization of their products. Analysts and market participants have mixed views on this group of stocks, saying that while these companies may carry a great deal potential in the longer term, they also carry many risks. "Alternative energy stocks are all risky at this stage," said John Quealy, an analyst at Canaccord Adams who covers some of these stocks. Still, he said he believes that small cap investors should be overweight on this sector at present because the industry is beginning to mature as companies develop new products and learn to lower their costs. President Bush has recently drawn attention to the subject of alternative energy, and that has helped bring these stocks into the spotlight, he said. Analysts suggest that investors pick those alternative energy companies that have the best order flows, good partnerships and have been successful in tapping existing markets for their products. "The most attractive alternative energy companies are those that have interim markets to do business, like doing development work for the military, while waiting for larger markets develop," said Brion Tanous, an analyst at Merriman Curhan Ford & Co. Tanous says one stock he likes in this group is Quantum Fuel Systems Technologies Worldwide (QTWW), a company involved in the storage of hydrogen and the integration of hydrogen into vehicles. The technology offered by this company is effective, but reducing the cost of the hardware will be the next hurdle to cross, he said. The military is increasingly spending on and tapping into equipment that uses hydrogen, he said. Quantum and another small company called Hydrogenics Corp. (HYGS) are both beneficiaries of this trend and could see added benefits as military spending increases in this direction. Small companies working the solar power sector are also interesting because of explosive growth of this technology in California and the rest of the world, Tanous pointed out. He has a buy rating on Evergreen Solar Inc. (ESLR), a maker of the base materials that collect sunlight and convert it into energy. That stock's price has more than tripled since the end of 2004, and it was trading recently at $15.95. Still, the valuations of some of these stocks raise concerns. Tanous believes that FuelCell Energy Inc. (FCEL), which makes large-scale fuel cells that would power electricity in buildings, is overvalued relative to the company's stage of penetration into the market. (A fuel cell is a device that consumes hydrogen and converts it into electricity with no pollutants.) Fund managers have their reservations about these stocks, but they also acknowledge their potential. Jim Madden, portfolio manager at mutual fund Portfolio 21, which holds some stocks from this group, points out that most pure-play alternative energy companies are losing money. That is why his fund has only small positions in most of these stocks. For instance, holdings in Quantum account for just 0.2% of the total holdings of the fund. Plug Power Inc. (PLUG) accounts for 0.1% of total holdings, Energy Conversion Devices Inc. (ENER) roughly 0.1%, Impco Technologies Inc. (IMCO) about 0.2% and Ballard Power Systems Inc. (BLDP) 0.1%. At the same time, Madden acknowledges that factors such as a new tax law, new products or a partnership unexpectedly could give some of these companies a big boost. Or some of them could get bought out. That is why the fund holds a basket of alternative energy stocks but has just a small holding in each. "The supply and demand for the products of those (alternative energy) companies is in flux. It's not a mature industry," said Carsten Henningsen, chairman of Portfolio 21, which broadly focuses on companies that have made a commitment to environmental sustainability. He likens the next-generation energy sector to the computer industry in the 1980s, when several companies were coming up with new products, but it was hard to pick the ones that would succeed. Meanwhile, Cannacord Adam's Quealy has a suggestion for investors in the small cap sector who would like to reduce the risks involved in putting money in the alternative energy group. He recommends looking at automatic meter reading companies and clean coal companies such as Itron Inc. (ITRI) and Fuel-Tech NV (FTEK). These companies are using products more smartly, and greater acceptance of their products makes them safer bets, he said. Quealy and Tanous don't own shares of the specific companies they discussed. Merriman Curhan Ford has conducted investment banking services for Evergreen Solar and make a market in the shares of Quantum, Fuel Cell and Hydrogenics. Fuel Tech is a non-investment banking, securities-related client of Cannacord, while Itron is an investment banking client. -Anjali Cordeiro, Dow Jones Newswires; 201-938-2408; anjali.cordeiro@dowjones.com
(END) Dow Jones Newswires